Tuesday, October 31, 2017

Imagine Harvey Weinstein wielding a "top secret" stamp to block any exposure of the uncomfortable truth and you have the FBI, CIA and NSA.

One way to interpret the intelligence community's reluctance to let all the Kennedy assassination archives become public is that the archives contain evidence of a "smoking gun": that is, evidence that the intelligence agencies of the United States of America were complicit in the assassination of the President.

I think the agencies fear something larger: exposure of their gross incompetence, their "cowboy" recklessness and their disavowal of elected-civilian control. Their fear of this exposure is based on one simple fact: nothing's changed since 1963. They were unaccountable and incompetent then, and they remain unaccountable and incompetent now. The only difference is their funding has greatly increased.

We rarely get an insider's glimpse of the intelligence community's pettiness, hubris and incompetence.The Ministry of Propaganda is tasked with showing the NSA, CIA, FBI, et al. as super-competent, super-dedicated, and focused on defeating evil (which is always presented as unambiguously evil, i.e. anti-American.)

I've read many books on the intelligence community, but few (if any) reveal the inter-agency rivalries and bad blood that (as far as I can tell) still exist beneath a formal veneer of co-operation. The CIA and FBI were always envious of the NSA's SigInt (signal intelligence, i.e. eavesdropping), and so they've attempted to create their own versions, with laughably incompetent results in the case of the FBI's "Russians stole the election" inquiry.

The CIA was also envious of the Pentagon's Black Ops capabilities, so they created their own Black Ops division as well as SigInt capabilities. They also horned in on the FBI's monopoly on domestic spying in the 1970s; they wanted it all, and chose to create their own versions of the competing agencies.

Unfortunately for the nation, their petty rivalries, general incompetence and penchant for political vendettas, coups, assassinations, patsies, fall-guys, and other "cowboy" recklessness is vividly revealed by the Kennedy archives.

Rather than protect the nation, these unaccountable and uncontrollable agencies have endangered the nation behind their Iron Curtain of secrecy, a convenient cloak which masks their hubris, incompetence, pettiness and complicity in cover-ups of the truth that cannot be revealed to the American public lest it embarrass the powerful.

Imagine Harvey Weinstein wielding a "top secret" stamp to block any exposure of the uncomfortable truth and you have the FBI, CIA and NSA. Forget the smoking gun, look at the complicity in the cover-ups of incompetence and gross errors of judgment: no conspiracy or tin-foil hat required.

Monday, October 30, 2017

Centralized banking and all other forms of intermediary rentier skims are presented as solid. If history is any guide, these supposedly solid entities may well melt into air.

Why is bitcoin considered such a big deal? Why has it grabbed so much mind-share, and why is it skyrocketing? And why is the cryptocurrency sector going bonkers?

The short answer is that cryptocurrency is the first major innovation in money in 300+ years, back when central banks first emerged in the late 1600s as centralized clearing houses for international payments and sole issuers of national bank notes/currency.

(Those who trace central banking to the Bank of Amsterdam's founding in 1609 might say it's the first major innovation in 400 years.)

Why is it an innovation? There are four basic reasons:

1. It's a form of private-sector issued money. It is not issued or controlled by any government or central bank.

2. It is structured in a completely different manner than conventional central-bank issued currency: it is a digital form of money that is issued as payment for those who maintain the database (the blockchain) on their privately owned computers. Since the blockchain is distributed over numerous computers, it is decentralized and distributed rather than centralized.

3. It enables trusted transactions between parties without requiring the services of an intermediary, i.e.a bank which acts as a trusted clearing house for transactions.

4. In the case of the first cryptocurrency, bitcoin, its issuance of tokens (coins) is limited by its design to 21 million coins. No central authority can issue more bitcoins, nor does the structure of the bitcoin blockchain allow for further issuance.

To grasp the significance of these four characteristics, we have to go back to the early history of modern capitalism. My longstanding recommendation is to start with Fernand Braudel's 3-volume history, Civilization and Capitalism, 15th-18th Century:

Many of the functional pieces of modern capitalism were private-sector innovations, starting with banking and credit (some of which was borrowed from Arab traders). In the good old days of the 1500s, if the King of Spain wanted to finance a costly voyage around the world (Magellan's circumnavigation in 1519-1522), he turned to private-sector lenders.

Insurance, stock markets, futures markets and options were all private-sector innovations designed spread the risk and reward of ventures such as trading voyages to the Spice Islands.

Since so many ships were lost at sea, backers sought insurance for the losses, and the trade in shares of the ship's cargo and the insurance against its loss enabled a lively trade in these financial instruments that were the rough equivalent of modern-day options.

When a merchant vessel was seriously overdue, the value of the shares of its cargo plummeted as investors gave up hope of earning their hoped-for return. So some enterprising traders paid watchers to scan the shoreline for incoming ships matching the description of the overdue ships.

Should the overdue ship appear off the coast of France, runners would hurry to Amsterdam to inform the trader who would then promptly scoop up cheap shares of the cargo, scoring huge profits when the ship docked a few days later, cargo intact.

The rate of expansion of private-sector innovations is much higher than those of centralized authority. Centralized authority must act deliberately, and in consultation with all the various power centers of the society and economy. Disagreements can incapacitate the system for years or even decades.

The private sector, in contrast, is a free-for-all of a multitude of players with an enormous range of ideas, schemes, scams, risk appetites, insider knowledge (i.e. asymmetric knowledge), capital, expertise and so on, all networked through a fast-expanding spectrum of media and exchanges.

This private-sector ferment is on display in the cryptocurrency space. Scams and brilliant innovations are shoulder to shoulder in a fast-moving mob. No wonder so many players and traders want to join the mob and figure out some competitive advantage or gain some asymmetric knowledge, knowledge which can be as simple as the understanding that hard forks aren't bad for bitcoin, as so many feared, as each new iteration claims to improve some aspect of bitcoin's functionality.

Over 100 hedge funds and other institutional players are muscling into the market, anxious to scale in and scale up before competitors grab market share.

If we compare the market cap of all cryptocurrencies, currently $178 billion, with the total financial assets of the global economy ($300+ trillion) and real estate ($200+ trillion), we get a sense of "early days." Bitcoin's market cap of $100 billion wouldn't even show up as a thin line on this chart of global financial assets:

Here is a one-year chart of bitcoin:

As Marx presciently noted, capitalism melts all that is solid into air. (All that is solid melts into air.) Centralized banking and all other forms of intermediary rentier skims are presented as solid. If history is any guide, these supposedly solid entities may well melt into air.

One of the most durable claims of cryptocurrency skeptics is that "governments will ban bitcoin once it threatens their fiat currency or their control." Ben Bernanke recently gave voice to this claim as if it was received wisdom.

Sorry, crypto-skeptics: Japan just killed the "bitcoin will be banned" meme.Japan has established itself as the safe haven of all legit cryptocurrencies and cryptocurrency exchanges.

Japan is not just the world's third largest economy; it is a keystone of the global economy in supply chains, ownership of overseas assets, capital flows and technology. Japan's embrace of cryptocurrencies suggests the Japanese understand that adoption of crypto and blockchain technology offers whatever nation is firstest with the mostest in legal protection of these technologies will have a powerful competitive advantage.

Many crypto skeptics claim the U.S. can browbeat adopters of bitcoin into banning cryptos via various threats such as limiting access to U.S. banking. Memo to skeptics: Japan is too strategically important for the U.S. to browbeat over something as small in scale as cryptos. Furthermore, Japan is long past the point where it will automatically comply with every self-destructive demand of the American Imperial project.

As I have often noted here, the market cap of the entire crypto market--$170 billion-- is mere signal noise in the $500+ trillion market of global assets. Even if the crypto market rose 10-fold to $1.7 trillion, it would still be nothing but a tiny blip in the global asset marketplace.

Japan has the regulatory legal and bureaucratic structure to monitor and police crypto exchanges and transactions. This complex structure can be deployed to bog down whatever Japan doesn't favor in endless red tape, or it can accommodate whatever Japan favors. Clearly, Japan favors the adoption of cryptocurrencies and blockchain technologies.

The legalization of cryptocurrencies is now a done deal. Any nation foolish and self-destructive enough to attempt to outlaw cryptos will simply hasten the flow of capital to Japan and other safe-haven early adopters.

Clearly, the Japanese recognize the adoption of cryptocurrencies and blockchain technologies as a competitive advantage, and they're right.

Saturday, October 28, 2017

As central bank policies are increasingly fingered by the mainstream as the source of soaring wealth-income inequality, policies supporting credit/asset bubbles will either be limited or cut off, and at that point all the credit/asset bubbles will pop.

I've long held that if a problem can be solved by creating $1 trillion out of thin air and buying a raft of assets with that $1 trillion, then central banks will solve the problem by creating the $1 trillion out of thin air—nothing could be easier.

This is the lesson of the past eight years: if a problem can be solved by creating new money and buying assets, then central banks will solve that problem.

Problem: nobody’s left who can afford to buy the new nosebleed-priced flats that underpin China’s miracle-grow economy. Solution: create new currency, lend it to local government agencies who then buy the empty flats.

Problem: stagnant employment and deflation. Solution: create a trillion in new currency, buy a trillion in new government bonds that then fund infrastructure projects, i.e. bridges to nowhere.

And so on. Any problem that can be solved by creating a few trillion out of thin air and buying assets will be solved. The mechanism to solve these problems--creating currency out of nothing--is like a perpetual motion machine: there are no intrinsic limits on the amount of new money that can created at near-zero interest, as the interest payments can be funded by new money.

Even better, the central bank (the Federal Reserve) buys Treasury bonds with the new currency that generate income, which is then returned to the Treasury: a perpetual-motion money machine!

The policy of creating trillions in new currency and buying trillions in assets has inflated an everything bubble, a bubble in all the asset classes being supported or purchased by central banks and their proxies.

Many observers wonder what, if anything, could pop the everything bubble.

This leads to an interesting question: what problems can’t be solved by creating another trillion and buying assets?

What Problems Can’t Be Solved by Creating Another Trillion and Buying Assets?

The past eight years have created the comforting illusion that essentially all problems in the modern era of globalized, centralized, debt-based, state-cartel capitalism in all its flavors (Chinese, Japanese, European, American, etc.) can be solved by creating as many trillions as are needed (whatever it takes) and buying assets or issuing guaranteed lines of credit with the new currency.

But there are some structural problems that can’t be solved by this mechanism. Some are primarily economic, some are primarily political-social, but all of them affect the entire system, not just the financial realm.

Inflation

We're told that inflation--the loss of purchasing power of a currency--is near death and this greatly saddens the globe’s central bankers, who desperately need inflation to push wages higher and reduce the burden on debtors.

So let’s say, just as a thought experiment, that central banks get their much-desired inflation, but it runs hotter than their 2% annual target. Once inflation is embedded in expectations and the supply chain, printing another trillion and using it to buy stocks, bonds, empty flats, etc. won’t make inflation go away. Rather, the inflation in asset valuations generated by endless central bank buying if assets ends up feeding real-world inflation as all this new currency doesn’t actually produce more goods and services; it simply expands the supply of currency sloshing around the world looking for speculative yield.

The chorus of voices advocating for Universal Basic Income (UBI) is growing, and central banks will increasingly be pressured to issue new currency to fund UBI and its equivalents—what’s known as helicopter money, as the central bank issues currency that then funds deficit spending, i.e. the government dropping cash into the real economy.

Helicopter money comes in a variety of forms: debt forgiveness, negative tax rates (i.e. tax rebates to those who owe no income taxes), and cash stipends such as UBI. In every case, this helicopter money doesn’t expand the supply of goods and services; all it does is expand the funds available for consumption.

While China may be able to export deflation in goods that are tradable, that is, commoditized goods that can be made anywhere and shipped to markets elsewhere,nontradable goods and services such as local government services, housing, groceries, fast food, most healthcare services, haircuts, education, etc.--the bulk of the real economy--soar in price as the supply of money expands faster than the supply of these goods and services.

This is why inflation is already running extremely hot in nontradable sectors(which are often dominated, funded or controlled by the public sector/government), while deflation is still visible in tradable goods such as TVs, software, etc. I covered real-world inflation rates in The Burrito Index: Consumer Prices Have Soared 160% Since 2001(August 1, 2016))

As political pressure on central banks mounts to fund QE for the people, QE for Main Street, etc., that is, helicopter money in one form or another, the introduction of new currency into the real economy has the potential to make real-world inflation undeniable.

Once inflation is undeniably in the 5% to 7% range, who will be willing to buy a negative-interest rate bond, or a bond paying 1%?

Another potential engine of inflation that’s widely discounted is global shortages of key commodities such as oil, grain, fresh water, etc. The global economy has come to view cheap, abundant commodities as the natural and permanent state of affairs, but history tells us that abundance and low prices are not permanent. Since essential commodities are integral to the global supply chain, any price increases due to scarcity or supply disruption quickly feed inflation into the entire supply chain.

Inflation is a problem that creating another trillion won’t solve; creating and distributing another trillion or two will actually make the problem worse.

This chart depicts the inconvenient reality: central bank currency-creation-asset-buying has enriched the top of the wealth-power pyramid, with limited trickledown to the top 10% and negative effects on the bottom 90%.

The consequences of this outcome of central bank stimulus-for-the-already-wealthy can manifest in all sorts of ways.

Political pressure on central banks may grow, forcing policy changes or even limiting the scope of central bank largesse to banks and financiers.

Social movements demanding UBI and other income-distribution policies may become mainstream, a dynamic that as described above will add to the inflationary pressures building in the real world.

Once again, creating another trillion and buying more assets held by the wealthy won’t fix this problem--it will only make it worse.

Fragmentation of the Elites

As I have often noted, historian Michael Grant identified profound political disunity in the ruling class as a key cause of the dissolution of the Roman Empire. Grant described this dynamic in his excellent account The Fall of the Roman Empire, a book I have been recommending since 2009.

The chapter titles of the book provide a precis of the dynamics Grant identifies:

As central bank creation of currency and asset purchases fail to solve the problems outlined above, these dynamics will undermine the status quo rather than prop it up. As central bank policies are increasingly fingered by the mainstream as the source of soaring wealth-income inequality, policies supporting credit/asset bubbles will either be limited or cut off, and at that point all the credit/asset bubbles will pop.

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